1. To Accompany “Economics: Private and Public Choice 13th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: Joseph Connors, James Gwartney, & Charles Skipton Full Length Text — Micro Only Text — Part: Chapter: Next page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Income Inequality and Poverty 528 3 15

2. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. How Much Income Inequality Exists in the United States?

3. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Lowest 20% of recipients 4.5 4.8 5.4 5.1 4.6 4.3 12.2 24.0 12.2 23.8 11.6 24.3 10.8 23.8 9.8 22.7 12.0 23.4 41.3 40.9 41.6 44.3 47.7 42.7 1950 1960 1970 1980 1990 2000 17.4 17.8 17.6 17.5 16.6 15.4 Second quintile Third quintile Fourth quintile Top 20% of recipients Family income before taxes 3.5 4.3 9.7 22.7 8.5 22.5 48.3 50.5 Before After 15.0 Impact of taxes & transfers on 2007 household income Sources: Bureau of the Census and Congressional Budget Office -- see text for list of references. Share of Money Income by Quintile Income inequality fell in the 1950s and 1960s, but since the 1970s it has been increasing. Due to transfer programs and the progressive taxation of income, after tax and transfer income is more equal than before tax income. 4.1 9.7 23.3 47.4 2007 15.6

4. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Factors Influencing Income Distribution A high portion of annual income inequality is due to differences in: age, education, family size, marital status, number of earners in the family, and, time worked. Young, inexperienced workers, students, single-parent families, and retirees are over-represented among those with low incomes.

5. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Bottom 20% of income recipients 10.0 31.0 46.0 23.0 31.0 63.0 12.0 79.0 9.0 2.0 Percent with less than high school Percent with college degree or more under 35 35 - 64 65 and over Education of householder 52.0 48.0 7.0 93.0 Married-couple family (% of total) Single-parent family (% of total) 2.9 3.4 Source: http://www.census.gov and author calculations from the March 2008 Current Population Survey.http://www.census.gov Top 20% of income recipients Age of householder (percent distribution) Family status Persons per family 0.8 2.2 Earners per family 8.0 29.0 % of total hours worked supplied by group 12.064.0 % of married-couple families in which wife works full-time High and Low Income Families, 2007

6. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Why Has Income Inequality Increased? Income inequality in the U.S. has increased due to the growth of: both single-parent and dual-earner families as a share of the total, earnings differentials on the basis of skill and education, the number of “winner-take-all” markets, and, lower marginal tax rates inducing high earners to report more income.

7. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Income Mobility and Inequality in Economic Status

8. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Income Mobility Annual income data hide the movement of people up and down the income distribution over time. Tracking of household income over time shows there is considerable movement both up and down the income spectrum.

9. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Top paid quintile 53.0 23.0 24.5 14.0 6.5 14.022.524.0 12.0 5.512.523.5 53.5 25.0 5.5 4.5 12.0 32.524.0 28.0 33.525.5 5.07.510.4 Next highest quintile Middle quintile Next lowest paid quintile Lowest paid quintile Highest quintile Next highest quintile Middle quintile Next lowest-paid quintile Lowest paid quintile Percentage Distribution by Income Status of Family in 2004 Income Status of Family in 1994 Income Mobility The table above allows us to see how families in each income bracket in the U.S. fared 10 years later. Does it appear to you that there is a significant amount of income mobility in the U.S. economy?

10. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Questions for Thought: 1. Do you think the current distribution of income in the United States is too unequal? 2. Indicate three factors that have contributed to an increase in income inequality in the United States since the mid-1970s. 3. (Which of the following is true?) Data on income inequality in the U.S. indicate a. The “rich” stay rich and the “poor” stay poor. b. there is substantial movement among income groupings in the United States.

11. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Poverty in the United States

12. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. 5.3 7.6 Female Black 8.3 1959 1976 2007 Number of poor families (millions) Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and http://www.census.gov.http://www.census.gov 4853 23 Percent of poor families headed by a: Person who worked at least some during the year Elderly person (aged 65+) 3027 26 149 22 5548 70 All families Married-couple families 10.19.8 18.5 Poverty rate (%) Whites Female-headed families 7.2 4.9 15.8 32.528.3 42.6 9.110.5 18.1 Children (under age 18) Blacks 31.1 24.5 55.1 16.018.0 27.3 Changing Composition of the Poor All individuals 11.712.5 22.4

13. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Transfer Payments and the Poverty Rate Income transfers have expanded substantially since the mid-1960s. These transfers have been largely ineffective at reducing the poverty rate. Though per capita income has increased substantially over time (more than 125% since 1965), the poverty rate of working-age Americans has stayed about the same.

14. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and http://www.census.gov. http://www.census.gov Poverty rate Poverty Rate, 1947-2007 32.0 18.5 13.9 10.0 9.7 10.3 10.7 8.7 9.9 The official poverty rate of families declined sharply during the 1950’s and 60’s … but has been relatively constant at about 10 percent since 1968. 194719591965196819751980199020002005 9.8 2007

15. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. 194719591965196819751980199020002005 Poverty rate Poverty Rate, 1947-2007 The orange shaded part of the bars indicate the drop in the poverty rate when non-cash benefits are counted as income. With non-cash benefits added, the poverty rate during most of the period since 1968 has ranged from 7% to 8%. 32.0 18.5 13.9 10.0 9.7 10.3 10.7 8.7 9.9 Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and http://www.census.gov. http://www.census.gov 9.8 2007

16. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Income Transfer Effects Income supplements large enough to significantly increase the economic status of poor people will: encourage behavior that increases the risk of poverty create high implicit marginal tax rates that reduce the recipient’s incentive to earn. Samaritan’s dilemma: the dilemma that occurs when income is transferred to the poor because the transfers reduce the opportunity cost of choices that lead to poverty. Thus, providing income transfers to the poor and discouraging behavior that leads to poverty are conflicting goals.

17. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Income Inequality: Some Concluding Thoughts

18. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Income Inequality Positive economics cannot determine how much inequality should be present. Income inequality reflects differences between individuals and influences their incentive to develop resources and engage in productive activities. The nature of the process, as well as the pattern of income distribution, is relevant to the issue of fairness.

19. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Questions for Thought: 1. What is the poverty threshold income level? How is it measured? Is the threshold adjusted for family size? Is it adjusted for inflation? 2. What impact did the expansion in government income transfers during the 1960s have on the poverty rate? Was the War on Poverty successful? Why or why not? 3. Do individuals have a property right to income they acquire from market transactions? Is it a proper function of government to tax some people in order to provide benefits to others? Why or why not?

20. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. Questions for Thought: 4. What determines whether a distribution of income is fair? Do you think that the major income transfer programs of the U.S. are fair? 5. The outcome of a state lottery game is certainly a very unequal distribution of the prize. Some players are made very rich while other lose their money. Is this outcome fair? Is the process fair? Discuss.

21. Jump to first page Copyright ©2010 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. End Chapter 28